When it enters into effect on a date yet to be determined, the new Malaysian Companies Act 2016 will make significant changes to Malaysia’s corporate insolvency regime. Key reforms include the introduction of:
- two new corporate rescue mechanisms: judicial management and corporate voluntary arrangement; and
- additional controls on court sanctioned schemes of arrangement to make this process more effective as a means of effecting corporate debt restructuring.
The new judicial management mechanism will allow a company, its directors or a creditor, to apply to the Court to place the management of the company in the hands of a qualified insolvency practitioner known as a judicial manager.
The role of the judicial manager is to prepare and table a restructuring plan for creditor approval and, upon approval by 75% in value of creditors whose claims have been accepted by the judicial manager, to oversee its implementation. The judicial manager is empowered with certain powers akin to that of a liquidator in a winding up. Like a liquidator, a judicial manager is also subject to a degree of control and supervision by the Court.
The application for a judicial management order will be allowed if the company is or will be unable to pay its debts and there is a reasonable probability of rehabilitating the company, preserving all or part of its business as a going concern or otherwise serve the interests of creditors better than in a winding up.
From the time the application is made and for the duration of any judicial management order made, a moratorium will be in force to prevent any winding up order or any other legal proceedings against the company without leave of court, including enforcement proceedings by secured creditors.
Except in unusual circumstances, secured creditors have the power to veto an application for a judicial management order, and seek instead to proceed with the appointment of a receiver or receiver and manager.
Certain institutions regulated by the Central Bank of Malaysia and the Capital Markets and Services Act 2007, such as financial institutions, insurance companies and asset management companies, will be unable to access the judicial management regime.
Corporate Voluntary Arrangement
The corporate voluntary arrangement is conceptually similar to the current scheme of arrangement mechanism, where the existing management of a financially distressed company remains in control during the restructuring. The fundamental difference is that the implementation of the debt restructuring proposal will be supervised by an insolvency practitioner with minimal court supervision.
The process commences when the applicant – who may be the directors of the company, the liquidator or a judicial manager – lodges a proposal for the voluntary arrangement with the Court, whereupon a moratorium on actions by creditors commences automatically.
A meeting of creditors and members must then be convened by the insolvency practitioner who has agreed to act as the nominee. The required majority to approve a proposal is 75% of the total value of creditors present and voting, and a simple majority of the members. Once approved, the proposal becomes binding on all creditors and members. The nominee or another insolvency practitioner shall function as the supervisor of the voluntary arrangement to see to its implementation.
Although the corporate voluntary arrangement is procedurally straightforward, its practical use is likely to be limited, because it will not apply to public companies or any company with charged property, as well as certain institutions regulated by the Central Bank of Malaysia and the Capital Markets and Services Act 2007.
Improvements to the scheme of arrangement procedure
The only formal corporate rescue process currently available in Malaysia is the scheme of arrangement under section 176 of the Companies Act 1965. The provisions in section 176 are not confined to debt restructuring of companies in financial distress but generally, to adjust the rights of members and creditors, reorganize the share capital of the company or perform a reconstruction or merger in the case of a group of companies.
Procedurally, the company first applies to the Court to convene a meeting of the creditors or classes of creditors. In many cases however, the scheme does not progress beyond the application for court convened meetings due to the lack of a viable scheme to be presented to creditors. Not surprisingly, it is also at this stage of proceedings that a company may seek an ex parte order to restrain creditor actions. This provision was, for a time, notoriously misused to achieve temporary reprieve from creditor actions. The Companies Act 2016 addresses this problem by limiting the maximum duration for a restraining order to 3 months with extensions of up to a further 6 months only.
The Companies Act 2016 also allows the Court to appoint an approved liquidator to assess the viability of the scheme of arrangement proposed and prepare a report for submission to the meeting of creditors and members. This is on the basis that an independent liquidator will be able to adopt a more objective assessment of the commercial viability of a proposed scheme, and accordingly provide necessary assistance to the court.
It remains to be seen whether the judicial management and corporate voluntary arrangement regimes will be successful in rehabilitating ailing companies in Malaysia.